Old Hedge Funds Have Spring In Their Step

Sep 15 2008 | 2:00am ET

By Christopher Holt -- American novelist Mark Twain once wrote that ageing was “an issue of mind over matter. If you don’t mind, it doesn’t matter.” While this may be sage advice for most of us, it’s apparently not applicable to hedge funds of funds.  

A recently updated study by Roland Füss of the European Business School, Dieter Kaiser of the Frankfurt School of Finance & Management, and Anthony Strittmatter of the University of Freiburg finds that ageing has a dramatic impact on returns.

But the direction of that impact depends significantly on the size of the fund in question.  The study of over 600 funds of funds concludes that young large funds do much better with a few years of experience under their belts.  However, small young funds that never really grow are more likely to produce worse returns after a few years of trying.

The chart below from their paper summarizes its key findings:

This saddle-looking shape shows that young funds with few assets (left point on the saddle) post an average return of around 1% a month.  Funds that began life with more assets (bottom corner of saddle), on the other hand, tended to start with lower returns.

But as these rookies progress, the story changes.  The small funds did poorly as they grew old and the large funds actually got their acts together.  Large funds that made it to the quarter-century mark were doing quite well while the smaller members of their cohort flailed around.  This makes intuitive sense, really.  If your fund was 25 years old and still wasn’t very large, you must not have been cranking out very attractive returns.

A final note about this report.  The demographics of sample of funds of funds used in the study reveals a lot about the fund of funds industry.  The table below (with our circles added for emphasis) shows that while the average fund of fund studied had assets of US$139 million, the median was only $47.5 million.  In other words, the sample was very skewed to the right (the multi-billion dollar mega-funds).

It’s tough to make money at $139 million AUM, let alone $47.5 million.  But half the funds in this study had even less than that.  We hypothesize than many of these tiny funds never actually get beyond the so-called “friends and family” stage. 

The bottom line here is that young funds of funds can do well, but they need to grow before they get old.  If not, they may be well served by another of Mark Twain’s famous observations:

“The first half of life consists of the capacity to enjoy without the chance; the last half consists of the chance without the capacity.”

About the Author: Christopher Holt is a hedge fund expert who specializes in 130/30 strategies and publishes the widely respected blog AllAboutAlpha. He was formerly the head of institutional sales for JC Clark, a $400 million Canadian hedge fund manager. Prior to JC Clark, Holt spent 10 years in the management consulting industry with various firms including Ernst & Young. More of Holt's insightful musings can be found at www.allaboutalpha.com

In Depth

Q&A: Brevan Howard’s Charlotte Valeur Talks Strategy

Sep 18 2014 | 11:18am ET

Charlotte Valeur chairs the board of Brevan Howard Credit Catalysts, an LSE listed...


Hedgies Rock Out For Children's Charity

Sep 15 2014 | 8:40am ET

It's that time of year again—when hedgies trade in their spreadsheets for guitars...

Guest Contributor

Volkered: How Financial Sector Reforms are Creating Opportunities for Hedge Funds

Sep 16 2014 | 11:28am ET

New regulations have dramatically curtailed proprietary trading activity in investment...


Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…


Futures Magazine

September 2014 Cover

The London Whale: Rogue risk management

Credit default swaps brought down the London Whale and cost JPMorgan $6.2 billion. Here is how it happened.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.